The U.S. Treasury Department sets tax collection policy and tax laws. A branch o

Question

The U.S. Treasury Department sets tax collection policy and tax laws. A branch of the U.S. Treasury is the Internal Revenue Service (IRS) that has adjusted tax brackets for the next year, which moves you into the next higher tax bracket than where you are now. Also, the federal government has released cost of living numbers and determined the inflation rate to be 4% annually. Both of these situations impact your budget and your financial plan. What parts of your budget and plan need adjusting? What alternatives are available to reduce taxes? How will you ensure the modifications to your budget and plan are effective?

Explanation / Answer

parts of your budget and plan need adjusting

First, pay attention to the long-term rate of inflation. Inflation cycles tend to be relatively long-term, so if there are a series of monthly inflation rates above the recent 2 to 3 percent level, it could be an indicator of worse things to come.

Second, be sure to consider inflation in your investment planning, especially with respect to your fixed income investments. With interest rates at low levels, it may be advisable to consider shorter or intermediate term bonds (and bond mutual funds) for the fixed income part of your portfolio, even if you have to accept a lower current return. Then if the inflation rate increases and bond values drop, owning shorter-term bonds will moderate the drop in bond values.

Third, factor a realistic inflation expectation into your financial planning. It is probably foolish to expect your cost of living to increase at the recent 2 to 3 percent level throughout your retirement years. The inflation rate is probably more likely to rise over the next several decades than it is to fall. In addition, some of your costs, such as healthcare, will increase as you age.

alternatives available to reduce taxes

ensure the modifications to your budget and plan are effective

budget Should serve as:

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business

Key performance indicators

To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

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